Well, with that enticing headline, who wouldn't want to read this? Read on.
We got an excellent result in the Massachusetts Court of Appeals (my first foray there, with our Tax Diva Kathy Parker not only leading the charge but doing the heaviest lifting - winning below, merci beaucoup), in a case that involved how to apportion franchise taxes, Commissioner of Revenue v. AT&T, 11-P-1462. Because it's an unpublished decision under Rule 1:28, here's a link to the decision. [Download Memorandum and Decision].
Basically, Massachusetts uses the "income-producing activity/cost of performance" approach for apportioning the sales factor for income from services. (Since this matter, the regulator passed an exception for telecommunication services and the Governor has proposed changing the law generally.) The income-producing activity/cost of performance approach follows UDITPA (the Uniform Division of Income for Tax Purposes Act), and is used by many states. One aspect of this approach is its upon occasion all or nothing results - the approach looks to where the income producing activity takes place, and the state where the greatest proportion of that activity is performed, measured by its costs, gets the whole enchildada. So, here, for example, AT&T's income producing activity was providing customers with access to its national network. The greatest proportion of the costs of providing that network occurs in AT&T's hub, NJ, not Massachusetts, so the sales factor in Massachusetts says 0.
The Department of Revenue didn't like that (the tax differential was around $2 million), so it argued that the relevant income producing activity was each call made or received in Massachusetts, and the costs related to those events were incurred in the Commonwealth. Phrased differently, the Department argued a transactional versus an operational approach. It lost, as reflected in the decision, basically because this question is one of fact, and the facts were found against it.
Some states have moved toward a market-based, versus the UDITPA approach, apportioning the sales factor based on where the customer is located (and that's where the Massachusetts telecommunications rule now goes).
So why do you care? Well, what about Maine? (This is called "Maineappeals" after all). A couple of years ago Land of Dirigo enacted a statute that says the following:
16-A. Other sales. Sales other than sales of tangible personal property are sourced as follows.
A. Except as otherwise provided by this subsection, receipts from the performance of services must be attributed to the state where the services are received. If the state where the services are received is not readily determinable, the services are deemed to be received at the home of the customer or, in the case of a business, the office of the customer from which the services were ordered in the regular course of the customer's trade or business….
36 M.R.S. s. 5211(16-A).
Crikey, Cathy, what does that mean? Well, the law is new, so there's no real authority. So, for example, say you represent an accounting firm with its headquarters in Maine. It has a client with offices all over the place. The client calls the firm and asks questions and the firm answers them. To what location are the sales attributed? Where were they "received"? If the firm sent an email response to 14 of the client's offices in 20 states, where did the client receive the information? If the firm call from Maine, is the client receiving it in Maine? Or is the advice received where the client is located? What if the client is all over the place? Is it the client's headquarters? What if accountants sometimes go to the client's office in say Boston, and sometimes the client's people comes to Maine? What if they sometimes meet in the middle, in say New Hmapshire?
Jeepers, you may be asking yourself, does this mean that taxpayers have to keep track of the percentage of every bit of work they do for out-of-state clients and measure it against in-state received work? If they want the firm's Maine sales factor to be a low as possible ….